Stephen Roach: The Human Contrarian Datapoint

We've been known to poke fun at economist Stephen Roach for some time. It's not that he's been a one-note piano (and that note is bearishness), but for awhile he always wrote the same thing "how soon we forget... Dutch tulips, .coms, housing, greed... collapse". Thanks for the lesson Steve. Then a few weeks ago, we noted that he had shockingly changed his tune, right about the time that the market was hitting new highs. We noted in half in jest (though in hindsight we'll say it wasn't in jest at all) that this was a troubling sign for the economy and the markets, that such a bear would become optimistic. Well, we know the story of the last few weeks. One has to feel a little sorry for the guy. If things continue to melt down, will people give him any credit for being prescient? Forbes' Rich Karlgaard goes farther than we would and calls him "The World's Worst Economist". We disagree in that most economists never even try to make macro forecasts, and will admit that they're terrible at it. Perhaps the lesson is that humans haven't a clue on how to predict economist gyrations:

Who else but Morgan Stanley’s Stephen Roach? In November 2004, he said
the U.S. had “no better than a 10% chance of avoiding economic
Armageddon.” Since then the economy grew about 4% annually. This kind
of shocking error has been, alas, typical of Roach. Since the recession
of 2001-2002, Roach has been unremittingly bearish. He was last bullish
in, no kidding,1999. Don’t bet on Roach, in other words.

Now Roach has done it again. Three weeks ago Mr. Permabear stunned the Street by turning bullish.
Global markets, of course, have taken a pounding since then … Morgan
Stanley’s own MSCI World Index is down about 5% since Roach turned
bullish. Here we must give a big shout of credit to the National Post’s
David Berman. On May 6, the Canadian columnist wrote that when Roach makes any kind of economic or market forecast, the opposite is almost certain to occur.

Comments

I have worked at Morgan for the past few years, and have read the internal posts Roach writes twice a week.

He writes more intelligently and articulately than any economist I have ever read and I've learned more from reading his posts that I did from any of my econ classes in college.

He's always bearish as far as I can tell, and his recent "bullish" stance is hardly bullish. He essentially changed his stance from "the world is going to blow up" to "the world is less likely to blow up than i initially thought."

Anyway, I guess the guy gets lambasted out there on the street, but as far as i can tell he's always correct in what he's saying fundamentally...he just can't get the timing of the effect of macro econ on specific financial markets all that correct (in the short run).

Todd's right. It's a huge distortion to call his post bullish. He expressed some relief that the G7 were actually working on the problem "considering taking the medicine."

The conclusion of his writing that day:
"I now believe that the odds are shifting away from a disruptive global rebalancing. That tempers my long-standing concerns over the possibility of a sharp decline in the US dollar and a major back-up in real long-term US interest rates that such a currency crisis might have triggered. Lest I be accused of succumbing to the ravages of terminal jet leg, I assure you that I am still mindful of the ever-present risks that beset a very fragile world. Oil prices above $70 are especially worrisome for the world’s oil consumers. The income- and saving-short American consumer concerns me most in that regard -- especially as the wealth effects from the US housing bubble now start to fade. The mounting geopolitical risks associated with the “Iran problem” -- all too reminiscent of the build-up before the Iraq War -- only compound my fears that oil-related disruptions of the world economy are here to stay. Nor do I dismiss the politically-induced backlash to globalization that has raised the distinct possibility of an outbreak of protectionism; Washington-led China bashing remains the biggest risk in that regard. And speaking of Washington, the US is rapidly becoming the global poster child for fiscal irresponsibility -- not exactly a constructive development for the world’s biggest borrower.

"No, I am not prepared to give an unbalanced world the green light. But it’s time to give credit where credit is due: First, to globalization for holding down inflation. Second, to central banks for collectively embarking on policy normalization campaigns. Third, to the stewards of globalization for facing up to the imperatives of architectural reform. And fourth, to Asia -- especially China -- for recognizing the unsustainability of export-led growth models. Notwithstanding the risks noted above -- all of which need to be taken very seriously -- I am delighted that the global economy finally seems to be taking its medicine. Let’s hope the cure works."http://www.morganstanley.com/GEFdata/digests/20060501-mon.html

Putting yourself out there twice a week in writing archived for everyone makes you an easy target to throw stones at.

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The Stalwart is a blog written by Joseph Weisenthal, covering such topics as stocks, business, economics, politics, technology, gambling, chess, poker, economics, current events, music, math, Chinese food, science, randomness, kurtosis, sports, evolutionary fitness, and anything else of the author's choosing. The words contained herein are the author's own, not affiliated with any other firm or employer.